Check out this comprehensive eight-step guide for first-time buyers by a man who's done it all and seen it all: lovemoney.com head broker Tim Wilson.
Hello! I'm Tim Wilson and you probably don't know me. You may not have read one of my articles before. That's because I'm not a writer - I'm a mortgage broker here at lovemoney.com and recently I've seen a big increase in the number of first-time buyers trying to identify whether now is a good time to buy their first home.
So I thought I'd write up my two pence - and use my experience in the market to offer some tips to homebuyers making that vital first step.
The right time to buy
First of all, let's return to that important question: is now the right time to buy? Obviously, I don't have a crystal ball. But I'm a big fan of using property as a long-term investment. So long as you buy for the long-term, I'm a firm believer there is never a wrong time to buy property (there is, however, a right time to sell - but that's another story).
If you've decided now is the right time for you to buy, where do you start? What would be the most sensible thing to do first?
Step 1: Work out your mortgage payments
It's very simple: plan your budget.
The easiest way to do this is to use an online calculator, such as this budget calculator from the FSA.
- Fill in as much as you can to make sure you cover all the angles. Add up all your regular monthly outgoings, such as your food, water, gas and electricity, phone and broadband bills, as well as any credit card debt or loan repayments.
- Don't forget to factor in the costs most people forget, such as the amount you spend going on holiday each year, how much you spend going out, what you spend on clothes and toiletries or any other regular treats you like to enjoy with your hard-earned cash.
- You'll need to set aside a small budget for insurance costs that come with a mortgage. For example, buildings insurance is a mandatory requirement, but also it's also a good idea to take out life insurance if you're buying jointly with a partner. Otherwise, your partner will be responsible for 100% of the mortgage payments should the worst happen to you. If he/she is then unable to afford the mortgage alone, the home will then be repossessed by the mortgage lender at the worst possible time I can imagine.
- The good news is, life insurance is pretty cheap - a 30-year old male non-smoker can get £200,000 worth of cover for 20 years for less than £10 a month. Small price to pay for peace of mind, isn't it?
- Similarly, you may want to consider income protection insurance, which will provide you with a regular income if you become unable to work through illness or an accident. And, of course, home contents insurance is always a good idea to protect your valuables. Always pay upfront with insurance - never pay monthly, or you'll typically pay a 10% premium. Use a 0% on purchases card if you need to spread your payments, and that way you can pay monthly and you won't be charged any interest.
Once you know your incomings and outgoings, you're left with the maximum sum you could afford to put towards your mortgage payments each month. But even though you could, in theory, afford to get a mortgage that big, it's unwise to plan to put this entire sum towards the mortgage. You need to cut yourself a bit of slack, just in case there are any extra costs or bills you haven't yet thought of.
That's also why, as a homeowner, it's vital to build up an emergency savings pot in case you have sudden costs you may suddenly have to fork out for - if your boiler breaks down or your plumbing stops working, or even worse: if you lose your job.
Don't forget, this is a big financial commitment: you need to make sure that, however your circumstances change, you can still afford to pay the mortgage every month!
Factor all this into your budget, and voila! What's left is the maximum mortgage payment you can comfortably afford. This will dictate how much you can borrow.
Remember: we're talking here about the maximum. You don't have to borrow that much. You may well wish to borrow less. It's your decision.
Step 2: Work out your deposit
Once you know the mortgage payment you'd be happy to pay each month, you need to figure out how big your deposit is.
Simple: it's how much you've got saved up, right?
Wrong. There are lots of fees and charges associated with buying a home: for example, legal fees (up to £1,000), mortgage fees (anything from £599 to £1,499) and valuation fees (depend on the property price - typically between £300 and £600). You may also have to fork out for Stamp Duty.
Then, there's your costs: namely, the cost of moving home, buying new furniture and a spot of DIY if the home you're moving into isn't quite as you want it to be.
Take your costs away from your savings, and you have your deposit.
This will also dictate how much you can borrow and at what rate. At the moment, the bigger the deposit the better the deal you will get from the mortgage lender. You'll need at least 10% to qualify for most deals, and the best deals are only available to those who have a 40% deposit or more.
Step 3: Get the best deal
Once you have identified your budget and your deposit, the next step is to shop around for the best mortgage deal.
Now, you have some options here. You can do all the leg work yourself and contact all the lenders or you could speak to a mortgage broker like me, and use my experience and knowledge to help you out.
I think it's pretty obvious which course of action I'd recommend! But not just because a broker can find you a great deal. I can also tell you how much different lenders will allow you to borrow and more importantly, the maximum you should borrow in order to stay within your affordable budget figure.
A good tip is to find a broker who offers whole-of-market advice and doesn't charge a fee. You don't have to commit to the deal they find you, but if you are unsure of how a mortgage works and what different types are available, then a broker's advice could save you both money and time.Just be aware that some lenders, such as HSBC and First Direct, only deal directly with borrowers, so you may want to do some research yourself as well and check out what these lenders are offering.
Compare mortgages at lovemoney.com or get fee-free advice from a lovemoney.com broker
Step 4: Get an agreement in principle
Once you've chosen your deal, it is always good advice to get an agreement in principle. This is a credit search on your name and address, and it will identify whether the mortgage lender will - in principle - agree to lend you the money you want to borrow.
You can usually get a certificate to prove that you have done this and it has been accepted. This is beneficial as you can show it to an estate agent to demonstrate that you can afford (and get) a mortgage immediately, which should put you in a strong position as a buyer.
It's important to remember at this stage that you don't want too many credit searches, as this can affect adversely your credit rating. So don't make multiple applications for multiple deals. Figure out which deal is the one you want, and apply only for that deal.
If your application for this deal goes through OK, then you do not need to have any more credit checks carried out. If it is declined, find out the reasons why before you have another done. You can always apply for your free credit report to see if there is anything on there that you are not aware of, and correct any errors. The mortgage advisor should be able to guide you on this.
PS. You are welcome to contact me directly with any queries you might have. Email tim.wilson@lovemoney.com or give me a call on 0800 804 8045.
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